Many welcome the EU’s new regulation for deforestation-free commodities, but concerns over the impact on small-scale farmers abound
By Lou Del Bello, China Dialogue
July 13, 2023
The EU’s unprecedented effort to eliminate deforestation from its supply chains fails to consider the poorest growers that form the backbone of palm oil production, say businesses and civil society in Southeast Asia. The oversight could cost developing countries dear and ultimately risks thwarting the bloc’s plan to protect the world’s forests, they add.
The EU deforestation regulation, approved by the EU Council on 16 May, sets the end of 2024 as a deadline to stop all imports and exports of products associated with deforestation at any point in their supply chain. It targets seven key commodities – cattle, cocoa, coffee, oil palm, rubber, soya, wood – and many of their derivatives.
“It’s time to fight climate change on every front,” says Mathieu Lamolle, senior advisor at the International Trade Centre (ITC), a joint United Nations (UN) and World Trade Organisation (WTO) agency. “And this is why regulating agri commodities that are contributing to deforestation is very important.” With the various policies under its Green Deal, the EU is showing a clear commitment to start addressing climate change on a mandatory basis, Lamolle says. “This is where [this intent] is becoming embedded into international trade and global value chains.”
Deforestation has been a prominent concern for the past 30 years, but it’s always been within the realm of bilateral agreements between countries, says Reza Azmi, founder and director of Wild Asia, a Malaysia-based enterprise that supports oil palm smallhoders. “More recently, governments have taken a backseat and the private sector has been speaking up about what they want to be defined as sustainable production.” The EUDR is the first large-scale experiment that brings the two dimensions together casting deforestation as a global trade issue, he says. (The EU’s 2013 Timber Regulation did seek to address illegal logging and deforestation through trade measures. It will be replaced by the new EUDR, which aims to address timber in conjunction with other commodities.)
In 2022, the EU was the fourth biggest consumer of palm oil after Indonesia, India and China. Indonesia is also the world’s largest producer of palm oil, and the EU’s main supplier, but a portion comes from Malaysia too.
The transition will impact most Europeans through products such as chocolate, leather, rubber tyres, and palm oil, a common ingredient in shop-bought food and beauty products. However, analysts have found that in the EU, palm oil is used mostly for energy, with about 65% of imports going into biofuels in 2018. European lawmakers have labelled the practice unsustainable and pledged to phase out the fuel by 2030.
If the impacts on European consumers are expected to be mainly positive, the same cannot be said for the producers on the other side of the planet who keep the global palm oil market going.
In order to make sure that the products that enter and exit its borders are deforestation free, the new regulation asks businesses to keep track of the journey of the commodity or product they want to sell, down to the plot of land where it was grown. And, if oil palm plantations are found to have displaced natural forests after the year 2020, the resulting edible oil cannot make it into the EU. Whoever breaches the rule will incur hefty fines among other penalties.
The regulation will also set up a new monitoring system to ensure compliance. It will audit producing countries, inside or outside the EU, depending on the estimated risk of forest loss or degradation. In countries deemed high risk, authorities will carry out checks on 9% of a sector’s traders and operators. While in standard- and low-risk countries, monitoring will involve 3% and 1% of the operators respectively.
“NGOs, but also independent smallholder organisations in Indonesia, have welcomed the regulation, because they see it as an opportunity to tackle deforestation and increase transparency in the supply chain,” says Perrine Fournier, trade and forest campaigner with the NGO Fern. Traceable, sustainable palm oil, she adds, is also attractive because it usually comes with a price premium. “Having said that, smallholders are facing some challenges because there are no policies and no national system in place able to inform companies on the traceability [of the product] down to the plots of production.”
Businesses now have 18 months to set up their own comprehensive traceability system from plot to supermarket shelves, or find a third-party organisation that can deliver it – a feat that many stakeholders fear will be all but impossible.
The new system will be based on three main steps, explains Anita Neville, chief sustainability and communications officer with the Indonesia-based Golden Agri-Resources (GAR), a company that controls 582,633 hectares of land used for oil palm. First, the EU requires geolocation data: “Physically, where did the fresh fruit bunch come from? Then… who owns that land?” And, finally, producers need to gather deforestation data. “Can you demonstrate through a combination of year-of-planting [records] and satellite monitoring, that the origin is free from deforestation, post December 2020?”
GAR is a complex operation. It produces 25% of its palm oil on its own plantations, with the other 75% coming from third parties, according to its reporting to the RSPO (Roundtable on Sustainable Palm Oil). It has six refineries and 49 proprietary mills, as well as using 429 third-party supplier mills, says Neville. These mills change through the year, she explains, due to quality and quantity issues, “and sometimes because they are failing to comply with our social and environmental policy. For a sense of scale, last year we onboarded 130 new supplier mills, and an individual mill can source from literally tens of thousands of smallholder farmers.” In this context, she says, “it is very challenging to be absolutely consistently hitting EUDR requirements. Because it takes time to do that traceability, the due diligence, all the checks to onboard a new supplier.” As a result, companies are likely to narrow the pool of suppliers to their refineries.
To understand what it would take to apply the EUDR data requirements to its supply chains, GAR modelled a single shipment using only proprietary suppliers, including refineries, mills and plantations. The analysts found that from plot to refinery, the palm oil journey comprised thousands of data points. “This is a vast data collection, storage and data analysis, documentation,” Neville says, “which we then have to share in a form that isn’t so large that it consumes all of the energy in the world just around this one service.”If tracking the journey of palm oil is that difficult even when only involving assets owned by a single company, the complexities increase manyfold when it comes to registering independent small-scale farmers. Smallholders form a sizeable slice of Indonesia’s producers, though precise estimates vary. According to the government, they make up just over 40% of national production, while satellite-based studies put this figure at around 33%.
“Big businesses have been implementing sustainable practices since way back,” says Insan Syafaat, executive director of the Partnership for Indonesia’s Sustainable Agriculture (PISAgro), a public–private industry association. “Even before the EUDR came into the picture, there had been a lot of push from certification bodies as well as from consumers in the EU, America [US] and beyond for countries to produce sustainably.”
However, when it comes to smallholder farmers, “when you try to link [the palm oil sector] with the EUDR [requirements], the impact will be more challenging for the smallholders,” who currently often don’t have the capacity and resources to make their product sustainable and compliant with the new framework. And because of their high number, this gap has a bearing on the entire industry.
“We need to increase access to finance, give them access to input materials such as high-quality seeds, or good fertilisers to help them increase their productivity without expanding into forest areas, for example.” Unfortunately, he says, the EUDR is thin on detail, and while it acknowledges the role of the smallholders, it doesn’t address the logistical and financial challenges they will face. “It seems that the EU is not aware of the reality on the ground in Indonesia, but also in countries like Malaysia, or Thailand or even Latin America.”
Syafaat reveals that big businesses are already at work to develop their own traceability systems, some relying on third-party agencies. And while there still is no definite figure on the overall financial impact of the EUDR implementation on palm oil producing countries, details are starting to emerge. Enrolling a single farmer into the EUDR traceability system “would cost around seven to eight US dollars.” Indonesia, Syafaat says, counts approximately 4.5 million smallholders.
A 2022 analysis by Chain Reaction Research considered the implications of the EUDR for palm oil actors and their financiers. The findings suggest that EU operators’ compliance costs would be at most 3.5% of a company’s palm-oil-related revenues. They also indicate that proper compliance could protect US$14.3 billion in reputation value for EU actors in the value chain.
If businesses want to achieve compliance with the EUDR in 18 months, an exceptionally tight deadline, chances are they may leave smallholders behind, at least initially, to rely on growers that are already operating within their supply chains.
But, according to GAR’s Neville, reducing the supplier pool would add fragility to the supply chain system, “and I think the pandemic years have shown us what fragility in supply chains can do to global trade: ships weren’t where they needed to be, products weren’t coming out, workers weren’t returning to work in the same way.”
Similar risks are inherent in the design of the EUDR, she says. “So our current concern is, are we building in supply chain risk, if we narrow to only a couple of refineries that can service the EU market? What does that do for our customers? What does that do if you have replanting schedules, or a very strong El Niño as we’re looking at now?”
Governments in Southeast Asia are rolling out measures to stem this risk. In Indonesia, the government is pushing for the Indonesian Sustainable Palm Oil (ISPO) standard to become compulsory both for businesses and smallholders by 2025. “This is our way to show Europe that big businesses are now taking responsibility for the whole landscape,” Syafaat says.
But Neville believes that the [ISPO] target is likely to be missed, “because of the sheer volume of work [it requires] and the lack of capacity within government to fulfil this pledge.” The process, she adds, “is incredibly bureaucratic and time consuming, and the whole exercise is going to be costly not just for companies like ours who wish to support smallholders to become compliant. It will cost smallholder farmer cooperatives in their own right.”
When it comes to agri commodities, says Lamolle of the International Trade Centre, there is a long history of developing good practices for production and traceability. “But the measures currently in place are not always consistent,” he says. “And then comes the question of the credibility of the claims that the palm oil from a given region would not contribute to deforestation at all.”
The EU sets a high bar with uniform, strict sustainability requirements, he says. “But the biggest challenge comes with the fact that different value chains and sectors operate quite differently.” In the case of palm oil, for example, “you would deal with a bigger number of large plantations. And it will be a bit easier to map the polygons where the palm oil is coming from.” But with coffee production or cocoa, things are very different, “because you have very small producers, sometimes they have less than five hectares. And in that sense, it is a lot more complicated to do the full traceability of all these different producers.” As an example, Lamolle looks at a single coffee container that enters the EU, and usually holds about 21 tonnes. “That single item carries coffee from around 400 producers. So, imagine the number of traceability statements, and geolocation [points] and proof of evidence that there hasn’t been deforestation associated with any of those 400 producers; and this is only for one container.”
Opinions diverge on whether the EUDR deadline is achievable at all, and whether the regulation’s architecture would have been more realistic had the EU lawmakers consulted developing countries on their palm oil first.
According to Wild Asia’s Reza Azmi, what the EU doesn’t ask, beyond due diligence and traceability, is “whether you’ve done your stakeholder consultation, whether you have your health and safety requirements in place” and other social and environmental factors that determine the true sustainability of agricultural practices.